Navellier Weekly Market Commentary
Dividend growth and conservative growth stocks exhibited tremendous relative strength this week. Despite this week’s strength, the stock market initially got up on the wrong side of bed early this week after both Caterpillar and NVIDIA warned that their sales were slowing due to a lack of demand from China. Complicating matters further for these multi-international companies is the fact that the U.S. dollar remains strong, while the Chinese yuan and most other currencies remain weak, so when multi-international companies are paid in eroding currencies, they all too often have to issue revenue warnings. Italy is now officially in a recession after announcing two negative GDP quarters in a row and suffering from rising unemployment, so the Eurozone’s growth is now increasingly precarious. Since approximately 50% of the S&P 500’s sales are outside of the U.S., I expect more multi-international companies may also issue revenue warnings in the upcoming weeks.
Fortunately, there are still some multi-international companies prospering. On Wednesday, for example, Boeing posted a substantial earnings surprise and provided positive guidance. So far, the fourth quarter results that have been announced for the S&P 500 are running at an annual sales pace of 7.4% and annual earnings pace of 13.5%. Currently, it is “every stock” for itself, so the companies that continue to surprise and guide higher, like Boeing, will continue to emerge as market leaders. Overall, this January was the strongest in 30 years, especially for small capitalization stocks that have had the strongest start in more than 40 years.
The saying that “as January goes, the year goes” is obviously a good omen moving forward. However, I still expect that the leadership of the stock market will become increasingly narrow in the upcoming months, simply because earnings momentum will continue to decelerate due to more difficult year over year comparisons. Furthermore, since many multi-international companies are now being hindered by slowing global growth and a strong U.S. dollar, it remains imperative to own more domestic companies, especially small and mid capitalization companies that naturally benefit when the U.S. dollar is strong.
The primary reason why the U.S. dollar is strong is due to (1) the U.S. is experiencing stronger GDP growth than other countries, (2) the Fed has raised key interest rates substantially above most other reserve currencies and (3) the U.S. has a strong, assertive leader. Speaking of President Trump, in his upcoming State of the Union address, I certainly hope that he will deliver a positive message regarding the U.S. economy and the outlook for rising prosperity
Speaking of a positive message, Fed Chairman Jerome Powell on Wednesday was very dovish and essentially signaled that the Fed will not be raising key interest rates for the foreseeable future. Specifically, in his press conference after the Federal Open Market Committee (FOMC) meeting, Powell said the case for higher interest rates “has weakened” because of muted inflation and somewhat slower U.S. growth, stressing the central bank will be “patient” before determining its next move. Finally, Powell clarified that the current level of interest rates is “appropriate for the state of the economy.”
Looking forward, the FOMC minutes said the Fed continues to believe “the most likely outcome” for the U.S. economy is sustained growth with strong labor market conditions and inflation near 2%. The most interesting comment in the FOMC minutes was “In light of global economic and financial developments and muted inflation pressures, the FOMC will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate to support these outcomes.” In other words, the China economic slowdown, Brexit and other global events are now influencing the Fed.
Speaking of global events, the chaos in Venezuela continues to escalate. This week, the U.S. imposed sanctions against Venezuela’s state controlled oil giant, PDVSA. These new sanctions will block $7 billion in assets and potentially cost Venezuela $11 billion per year in lost exports. Interestingly, Treasury Secretary Steven Mnuchin said that these new sanctions against PDVSA would have a minimal impact on U.S. refiners. Overall, these new sanctions are essentially a de-facto ban on crude oil imports from PDVSA’s largest customer (i.e., the U.S.). Due to the fact that most countries are no longer recognizing President Nicolas Maduro, who remains in control of PDVSA, Venezuelan crude oil will likely not be able to find new buyers, especially since most refineries are not set up to refine the predominantly heavy, sour crude oil from PDVSA. As a result, the inevitable collapse of Venezuela appears to be imminent, as soon as Maduro finds a country (e.g., Bolivia, Cuba, Mexico or Russia) that might facilitate his exile.
The economic news this week was mixed. On Tuesday, the Conference Board announced that its consumer confidence index declined sharply to an 18-month low of 120.2 in January, down from 126.6 in December. This was the third straight monthly decline and substantially below economists’ consensus estimate of 124. The expectations component plunged to 87.3 in January, down from 97.7 in December and is especially alarming. In the past, federal government shutdowns have also hindered consumer confidence, so it will be interesting if consumer confidence will quickly rebound. Nonetheless, consumer spending is expected to slow dramatically in the first quarter and the record cold in the Midwest and Northeast is also expected to curtail consumer spending. As a result, GDP estimates are falling fast and virtually no GDP growth is expected for the first quarter.
On Thursday, the Commerce Department announced that new home sales surged 16.9% in November to an annual rate of 657,000. This was a massive surprise, since economists’ consensus estimate was an annual rate of 571,000. Despite the November surge, new home sales declined 7.7% in the past 12 months. November was a relatively mild month for weather and that likely boosted home sales. However, now that much of the U.S. is now suffering from severe winter weather, new home sales are expected to remain suppressed until the weather improves.
Finally, the Labor Department announced today that 304,000 payroll jobs were created in January, which was substantially above economists’ consensus estimate of 170,000 and the 100th straight month of job creation. The unemployment rate actually rose to 4%, up from 3.9% in December, due to more workers entering the workforce. The federal government partial shutdown apparently caused some contract workers to seek other jobs, which substantially boosted the number of workers looking for jobs. The labor force participation rate rose to 62.3%, which is the highest since 2013. The December payroll report was revised to 222,000, down form 312,000 previously estimated. Also the November payroll report was revised to 196,000, up from 176,000 previously estimated. So in the past two months, payroll was revised down by a cumulative 70,000 jobs. I should add that on Wednesday, ADP announced that 213,000 private payroll jobs were created in January, which was substantially above economists’ consensus estimate of 174,000.
According to the Labor Department, wages only grew by 0.1% or 3 cents to $27.56 per hour, so wage growth was well below economists’ consensus estimate of 0.3%. Overall, the job market remains very healthy, but with minimal wage growth, inflationary pressures will remain low and the Fed will not be under any pressure to raise key interest rates. Overall, we are in a Goldilocks environment with strong job growth, low inflation, stable interest rates, a strong U.S. dollar and the fifth quarter in a row of double-digit earnings growth for the S&P 500. As a result, we can expect a very positive State of the Union speech on Tuesday night.
This information is general and does not take into account your individual circumstances, financial situation, or needs, and is not presented as a personalized recommendation to you. This is for informational purposes only and should not be taken as an offer to buy or sell any financial instruments and should not be relied upon as the sole factor in your investment making decisions. Individual strategies discussed may not be suitable for you, and it should not be assumed they were or will be profitable. Investment in securities involves significant risk and has the potential for partial or complete loss of funds invested. Navellier & Associates, Inc. claims compliance with the Global Investment Performance Standard (GIPS) and has prepared and presented this report in compliance with GIPS standards. A copy of this verification report is available upon request. All investing is subject to risk, including the loss of your principal. Navellier & Associates owns BA in managed accounts and a sub-advised mutual fund but does not hold CAT or NVDA. Louis Navellier and his family do not own CAT, NVDA or BA privately.